Return to search

NPL sell-off won’t solve bank problems, MEPs told

Forcing banks to sell off their NPLs could worsen their profitability woes, MEPs have been told.

Rules that force banks to offload non-performing loans (NPLs) will not help to restore bank profitability or lending capacity, one expert has warned MEPs.

A public hearing in the European Parliament over new European Central Bank (ECB) rules for euro zone NPLs, which some banks fear will lead to mass sell-offs, heard that such sell-offs may not be in the interests of banking stability.

Professor Andrea Resti from Bocconi University, told MEPs that “bank profitability and lending capacity cannot be magically restored by forcing lenders to hastily offload, or write off, non-performing exposures.”

In a paper prepared for the Parliament in October, Resti argued while institutions excessively burdened by NPLs suffered weak revenues and shrinking loan portfolios, legislators should assume that this correlation is linked to the causes.

He explained: “One should not infer, however, that low revenues and slow loan growth are caused by NPLs.”

He goes on to say: “While NPLs tend to be associated with modest profits and poor loan supply, they are not causing them, although they might make things worse.”

Resti said the problems of low profitability and loan growth are more likely linked to macroeconomic conditions, ineffective management and inadequate governance schemes. He said while some assets may need to be revalued, banks should not be pressured into writing off or selling their NPLs, which could worsen their situation.

The issue of NPLs seems set to the European Parliament and Commission on a collision course with the ECB, with both bodies raising concerns about the ECB approach after Italian banks raised fears they would be forced to fire sale their NPL portfolios due to proposals to apply new capital requirements retroactively to existing loans.

Italian banks also complained the rules would harm them while boosting hedge funds, as both hedge funds and private debt funds could benefit from opportunities to buy hastily-sold NPL portfolios from banks.